The
Foreign Exchange market, also referred to as the "FOREX" is the biggest
and largest financial market in the world. It has a daily average
turnover of US$1.9 trillion- just imagine that amount of money! Don't
you want to join this trillion-dollar industry?
FOREX is the simultaneous buying
of one currency and selling of another. Currencies are traded in pairs,
for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen
(USD/JPY). So basically, FOREX is trading.
There are two reasons to buy and
sell currencies. About 5% of daily turnover is from companies and
governments that buy or sell products and services in a foreign country
or must convert profits made in foreign currencies into their domestic
currency.
The other 95% is trading for
profit, or what you call speculation. Investors frequently trade on
information they believe to be superior and relevant, when in fact it
is not and is fully discounted by the market.
On one side of each speculative
stock trade is a participant who believes he has superior information
and on the other side is another participant who believes his
information is superior.
For speculators, the best
trading opportunities are with the most commonly traded (and therefore
most liquid- meaning its in cash or convertible to cash) currencies,
called "the Majors." Today, more than 85% of all daily transactions
involve trading of the Majors.
A true 24-hour market, FOREX
trading begins each day in Sydney, and moves around the globe as the
business day begins in each financial center, first to Tokyo, London,
and New York. Unlike any other financial market, investors can respond
to currency fluctuations caused by economic, social and political
events at the time they occur - real time- day or night.
The FOREX market is considered
an Over The Counter (OTC) or 'interbank' market. This is because the
transactions are conducted between two counterparts over the telephone
or via an electronic network. Trading is not centralized on an exchange
compared to stocks and futures markets.
Understanding FOREX quotes
Reading a FOREX quote may seem a
bit confusing at first. However, it's really quite simple if you
remember two things: 1) The first currency listed first is the base
currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece
of the FOREX market and is normally considered the 'base' currency for
quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD.
For these currencies and many others, quotes are expressed as a unit of
$1 USD per the second currency quoted in the pair. For example, a quote
of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01
Japanese yen.
When the U.S. dollar is the base
unit and a currency quote goes up, it means the dollar has appreciated
in value and the other currency has weakened. If the USD/JPY quote we
previously mentioned increases to 113.01, the dollar is stronger
because it will now buy more yen than before.
The three exceptions to this
rule are the British pound (GBP), the Australian dollar (AUD) and the
Euro (EUR). In these cases, you might see a quote such as GBP/USD
1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs,
where the U.S. dollar is not the base rate, a rising quote means a
weakening dollar, as it now takes more U.S. dollars to equal one pound,
euro or Australian dollar.
In other words, if a currency
quote goes higher, that increases the value of the base currency. A
lower quote means the base currency is weakening.
Currency pairs that do not
involve the U.S. dollar are called cross currencies, but the premise is
the same. For example, a quote of EUR/JPY 127.95 signifies that one
Euro is equal to 127.95 Japanese yen.
When trading FOREX you will
often see a two-sided quote, consisting of a 'bid' and 'offer'. The
'bid' is the price at which you can sell the base currency (at the same
time buying the counter currency). The 'ask' is the price at which you
can buy the base currency (at the same time selling the counter
currency).
